What Is the Purpose of Technical Analysis?

The core purpose of technical analysis is to carry out stock price forecast by looking at past data.

While fundamental analysis is one of the most effective methods of determining the long-term movements of a stock, technical analysis provides a similar tool for short-term traders. The latter is used universally by a large number of traders as it is quite important to them for various reasons. Some of them are elaborated below.

One of the most important assumptions that is made while undertaking technical analysis is that the stock prices follow a trend.

It identifies a pattern of fluctuations

One of the most important assumptions that is made while undertaking technical analysis is that the stock price follows a trend, and this trend repeats itself in a logical pattern. While identifying these patterns can be complex at times, it enables traders to make sense of the short-term fluctuations a stock experiences. More importantly,it helps in predicting the future movements of stock prices.

It enables effective decision making

Since most traders buy stocks and sell them (or vice versa) on the same day, they need to decide quickly on the purchase and sale price. However, using fundamental analysis for such a short-term trade is not possible. In such a scenario, technical analysis is the only type of research that can provide traders some idea about the direction of the stock price. There are several automated tools available today that can pull out technical information according to your preference.

It is important to note here that this type of analysis is based on a number of assumptions, and it gives utmost important to the price movement, ignoring other factors. Hence, the predictions related to price movements may not be always accurate.Despite this, it is widely used by traders mainly because it serves the above-mentioned two purposes.


This article (“Article”) is licensed to or is the property of Religare Corporate Services Limited (“RCSL”, which would mean to include its group companies, wherever applicable). This Article should not be reproduced or redistributed to any person or in any form in whole or in part without prior and explicit written consent of RCSL. This Article reflects the views of the author or content provider, and RCSL disclaims all liability, whatsoever, arising out of the substance or contents of this Article or in connection thereto, including any matter relating to infringement of intellectual property rights. This Article is purely for the purpose of public awareness and education and any reference to any financial product should not be construed as an offer or solicitation of an offer to buy or sell any securities, financial instruments or insurance. RCSL does not guarantee the accuracy or completeness of the information contained herein and there can be errors both typographical and in content. The Article may be referred only as a general guide and not as the ultimate source of the subject matter discussed. The Article must not be relied upon for taking personal, medical, legal or financial decisions and an appropriate professional must be consulted for specific advice tailored to specific situations. RCSL and any persons connected thereto do not accept any liability arising from the use of this Article. This disclaimer forms a part of, and should be read in consonance with, the Terms and Conditions of this site.

Copyright 2012 Religare. All rights reserved. Trademarks are the property of their respective owners.

This site is best viewed with Internet Explorer 7.0 or higher; Firefox 2.0 or higher.